CBO: Health reform to cut deficit by $50 billion more than we thought

Posted by Ezra Kleinat 01:12 PM ET, 03/15/2012TheWashingtonPost

Congressional Budget Office Director Douglas Elmendorf waits for the beginning of a hearing before the Joint Deficit Reduction Committee.
(Alex Wong - GETTY IMAGES)
I’m getting a lot of e-mails quoting articles like this one, by John Ransom, that say something like, “In a wholly predictable development, it turns out the cost for Obamacare will end up being twice the original price that the Democrats said.” Ransom also writes that I was “w-w-w-wrong” to say, back in January 2011, that the law “cuts enough spending and raises enough taxes to more than pay for itself.”

Actually, no, I wasn’t. That statement, in fact, is even truer today than it was then.

But let’s back up. The occasion for this dust-up is a set of updated cost estimates for the coverage provisions of the health-care law. The new estimates reflect a couple of factors. The Congressional Budget Office lists them:

- An increase of $168 billion in projected outlays for Medicaid and CHIP;

- A decrease of $97 billion in projected costs for exchange subsidies and related spending;

- A decrease of $20 billion in the cost of tax credits for small employers; and

- An additional $99 billion in net deficit reductions from penalty payments, the excise tax on high-premium insurance plans, and other effects on tax revenues and outlays—with most of those effects reflecting changes in revenues.

You’ll notice something about the above list: It appears to add up to a net reduction in the cost of the health-care law. And, sure enough, here’s CBO: “the insurance coverage provisions of the ACA will have a net cost of just under $1.1 trillion over the 2012–2021 period—about $50 billion less than the agencies’ March 2011 estimate.” You would get the opposite impression reading Ransom.

The problem for Ransom and others is that they didn’t read this analysis closely, or, if they did, they didn’t understand it.

Ransom quotes CBO saying “those provisions will increase deficits by $1,083 billion,” but he either didn’t notice or didn’t choose to include the CBO’s warning that this analysis does “not encompass all of the budgetary impacts of the ACA because that legislation has many other provisions, including some that will cause significant reductions in Medicare spending and others that will generate added tax revenues.”

As it says right in the title, this is just a look at “the insurance coverage provisions” of the Affordable Care Act. That is to say, it’s a look at the spending side of the bill. So it doesn’t include the Medicare cuts, or many of the tax increases, that pay for the legislation. It’s like reading only the “outlays” side of the budget and ignoring the “revenues” part. Of course that would make the deficit look huge.

But those other parts of the bill aren’t a secret. They’re mentioned right there in the analysis. Quoting again: “CBO and JCT have previously estimated that the ACA will, on net, reduce budget deficits over the 2012–2021 period; that estimate of the overall budgetary impact of the ACA has not been updated.”

It’s easy to do at least some of the update ourselves. This analysis shows the net cost of the coverage provisions will be about $50 billion less than previously estimated. That implies the law will cut more, not less, from the deficit than previous estimates suggested. In other words, this estimate says the bill is more, not less, fiscally responsible than was previously reported.

One other thing that’s confused some people is that this estimate is looking at a different timeframe than the original estimates. The CBO’s first pass at the bill looked at 2010-2019. But years have passed, and so now they’re looking at 2012-2021. That means they have two fewer years of implementation, when the bill costs almost nothing, and two more years of operation, when it costs substantially more.

But it also means that the included cuts and taxes, which grow with time, are larger. That’s why, when House Republicans wanted to repeal health reform in 2011, the estimated increase in the deficit was $230 billion, rather than the $130 billion that would have been expected from the 2010-2019 analysis. As you extend the analysis, the bill both costs more and saves more, and the savings grow more quickly than the costs.

There are a few other interesting things in the CBO report: It says, for instance, that the bill is now expected to cover 30 million Americans, rather than 33 million Americans. It doesn’t give a reason for the revision.

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